THE FUND MANAGER'S VIEW
Patrick Hodgens: Head of Macquarie funds management equities division.
What event(s) made the biggest impact on your portfolio this year?
The reassessment in the market of Chinese resources demand earlier in the year made the biggest impact on the Macquarie High Conviction Fund. This has driven an increase in bulk pricing expectations, resulting in strong returns for resource companies such as Rio Tinto.
How will the sub-prime crisis play out next year? Are we in for more pain?
The problems in the US sub-prime market are set to continue over the period ahead. With lending to this sector now all but non existent and house prices falling, borrowers are unable to refinance their mortgages. As such, the increase in repayments on these loans will result in a further rise in default rates for sub-prime mortgages. This will place more downward pressure on house prices, so it is likely that the problems in the sub-prime mortgage market will continue for some time yet, even if the US labour market remains resilient.
The negativity around credit markets more generally is likely to remain for some time. Although US activity has remained remarkably resilient, the risk remains that these issues will flow through to a weakening in the broader US economy.
Where do you see opportunities in 2008?
The growth in Chinese demand will continue to provide good investment opportunities throughout 2008. Primarily this will be in resources and related services stocks. Perhaps surprisingly, a sector in which we also expect to find good opportunities is consumer discretionary. Selected consumer discretionary stocks may continue to outperform despite rising interest rates, an environment which superficially would appear to be a negative for consumer exposure.
Where do you see risks in 2008?
The biggest risk we see for 2008 is that a recession in the US has an unexpected contagion impact across global growth and business spending. This would have a negative effect on most sectors, particularly resources. Additionally, the increasing interest rate differential between Australia and its trading partners and consequential pressure on the currency is a concern for non-resource companies and for many service providers including the travel industry.
With sentiment in global credit markets at best remaining fragile, and the likelihood of continued negative news flow regarding the sub-prime mortgage sector, a further marked deterioration in credit conditions remains a risk for the coming year.
What returns can we expect to see next year from investment markets at home and overseas?
We believe the Australian equity market is well positioned and expect to see total returns of around 10 per cent during the next year. Based on a fully hedged investment we expect to see overseas returns in the vicinity of 5 per cent - to 10 per cent. We believe that the Asian region will continue to perform well however there is uncertainty regarding the American market.
Are you nervous about the economic impact of a change of government?
No
Do you think environmental factors will play an increasing role in stock selection in the future?
We do believe that environmental factors will play an increasing role over time. As government regulation is introduced and consumer demand grows there will be a resulting impact on company profitability. We already assess stocks for their environmental impact, it currently has a low weighting in our models but we expect this to rise over time.
Where do you think the ASX/200 will be in December 2008?
6910
Roger Collison: Head of research for the intrinsic value equities team at Tyndall Investment Management
What event[s] made the biggest impact on your portfolio this year?
We have seen a continued strong takeover environment during 2007, including takeovers of Dyno Nobel, Alinta, Adsteam Marine, and Rinker ¬- which was the largest all-cash takeover in Australia's corporate history - and of course Rio Tinto.
How will the sub-prime crisis play out next year?
The risk from sub-prime lending in the US is not from the mortgages to low quality lenders themselves, but from the leverage they have onto the rest of the US banking system. The risk is widely held so it is difficult for the US Federal Reserve to deal with this by traditional interventions such as monetary policy or those adopted in the LTCM [Long Term Capital Management] crisis.
For these reasons, the location and extent of the problems will hard to predict. The maturity profile of the sub-prime mortgages likely to default will probably peak some time during 2008, which implies that the crises will get worse before it gets better. From an Australian perspective, spreads will probably widen to the disadvantage of yield plays, and the building materials companies with exposure to the US housing market may suffer. Overall, however, we expect that the Australian share market will be relatively protected.
Where do you see opportunities in 2008?
We continue to believe in the resources super cycle and would prefer to play this through Rio Tinto and the defensive utility stocks such as Macquarie Communications Group, SP Ausnet, Spark and Babcock and Brown Infrastructure Trust. We think that the subprime story, although still playing out, is well understood in the market and we see James Hardie as a highly attractive stock that fully reflects these risks.
Where do you see risks in 2008?
A change in government that makes policy changes affecting domestic healthcare stocks may form a risk.
What returns can we expect to see next year from investment markets at home and overseas?
Tyndall is projecting a market return of 13 per cent in Australia
Are you nervous about the economic impact of a change of government?
The policy settings of the two parties are quite similar and we perceive limited risks. Both parties will need to manage inflationary expectations carefully either because of government expenditure or wage growth.
Do you think environmental factors will play an increasing role in stock selection in the future?
We strongly believe that climate change will have an increasing influence on the investment markets and companies that do not take into account the risks are likely to find that their valuations, in the eyes of investors, are affected.
Where do you think the ASX/200 will be in December 2008?
7,327
